THE BUZZ 

Malaysia  will  reduce  export  duty  for  crude  palm oil  (CPO)  and  abolish  duty-free  export quota  from  1  Jan  2013.  The  new  export  duty  will  range  from  4.5%  for  CPO  priced  at RM2,250 per tonne, to 8.5% for CPO priced at RM3,600. For CPO price below RM2,250 per tonne, export duty will be zero.

OUR TAKE  

Market  gives  thumbs  up.  The  CPO  futures  market  reacted  positively  to  the announcement, recovering from its Friday low of RM2,379 to end the week at RM2,500. The new export duty scale was significantly better than the 8  ' 10% mentioned before. We  are  of  the  opinion  that  the  sliding  scale  for  export  duty  makes  sense  as  it  will encourage  more  CPO  exports  if  prices  are  low,  thus  helping  to  keep  the  ballooning inventory  in  check.  However,  we  believe  the  new  export  duty  should  have  taken immediate effect as the palm oil inventory is already at record high levels.

Possible  B10  implementation.  Malaysia  will  also  implement  a  nationwide  biodiesel programme by January 2013, using a 5% blend which will use up 500k tonnes of palm oil.  The  government  is  also  studying  the  possibility  of  implementing  a  B10  programme (10% blend), which will use up an additional 300k tonnes of palm oil. Malaysia is said to have some 2.7m tonnes per annum of biodiesel capacity, hence there is ample excess capacity should the government decide to raise the blend level.

Plenty  of  room  to  narrow  soy  oil  discount. The current near record spread between soybean oil and palm oil stems from the tight soybean supply and ample palm oil supply. If  the  government's  measures  are  successful  in  reducing  palm  oil  inventory  and
stabilising its prices, the spread should return to the normal range. Assuming a USD200 per tonne discount to soybean oil, the CPO price will recover by some RM500 per tonne i.e. prices to recover to RM3,000 per tonne.

Maintain  Overweight.  We  are  reiterating  our  Overweight  call  on  the  sector  as  we believe  the  measures  will  be  effective  in  reducing  palm  oil  inventory  and  stabilising prices over the long term, assuming proper implementation and execution.

Source: OSK